Mortgage closing costs are the fees you pay when you secure a loan, either when buying a property or refinancing. You should expect to pay between 2% and 5% of your property’s purchase price in closing costs. If you’re buying mortgage insurance, these costs can be even higher.
What Are Closing Costs?
Closing costs are the expenses that you pay when you close on the purchase of a home or other property. These costs include application fees, attorney’s fees and discount points, if applicable. With real estate sales commissions and taxes included, total real estate closing costs can approach 15% of a property’s purchase price.
While these costs can be substantial, the seller pays a number of these fees, such as the real estate commission, which can account for about 6% of the purchase price. Some closing costs, however, are the responsibility of the buyer.
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How Much You’ll Pay in Closing Costs
The total closing costs paid in a real estate transaction vary widely, depending on the home’s purchase price, loan type and the lender you use. In some cases, closing costs can be as low as 1% or 2% of the purchase price of a property. In other cases—when loan brokers and real estate agents are involved, for example—total closing costs can exceed 15% of a property’s purchase price.
In total, buyers should expect to pay between 2% and 5% of purchase price in closing costs. Their portion of the costs typically includes:
- One or two origination points—lender fees—that equates to 1% to 2% of the loan amount, and usually includes loan origination fees of $750 to $1,200)
- $1,000 or more in loan underwriting fees for things such as an inspection, appraisal, survey and title work
- One or more mortgage discount points if you choose to lower your interest rate by prepaying interest
- Up to 2% of the loan amount as an initial mortgage insurance premium if you decide to use insurance or a government-issued loan (such as an FHA loan) that requires it
The specific closing costs of a real estate transaction—and whether costs are the responsibility of buyers or sellers—are all outlined in the disclosure sections of a purchase agreement and determined by the lender and loan type that the buyer selects.
As for the mortgage itself, you can find your mortgage closing costs in two places: the loan estimate and the closing disclosure, both of which your lender is required to provide. The disclosures vary by lender but must include the total loan amount, interest rate, annual percentage rate and monthly payment schedule.
When Does a Seller Pay Closing Costs?
There are some closing costs that sellers almost always pay themselves. These include real estate agent commissions, prorated real estate taxes and transfer taxes. In certain cases, sellers may also pay the cost of a home warranty (if they’re providing one) and fees for any associations that their property belongs to.
In addition to these items, there are other costs that sellers may also pay, such as real estate commissions and title preparation fees. Ultimately, though, it’s all a matter of negotiation between buyer and seller.
If, on the other hand, you’re refinancing your home, you’ll be responsible for all closing costs.
How to Reduce or Avoid Closing Costs
When you’ve spent months or even years saving for a down payment, searching for a property, negotiating a purchase price, going through due diligence and securing financing, paying closing costs can be an unwanted surprise—and they can make it that much harder to afford your new property.
With that in mind, a lot of people want to try to reduce or avoid closing costs. While it’s impossible to eliminate closing costs entirely, there are some things you can do to reduce your expenses, including:
- Paying cash for the home. For most people, this isn’t an option. But if you can afford it, in some cases you’ll considerably lower your costs (perhaps by about 1% of the purchase price) if you don’t need a loan. You’ll eliminate loan origination fees and appraisal costs, among others.
- Going without a Realtor. As a buyer, you can’t really control the seller’s decisions, but if you buy a property that is for sale by owner, there are no commissions paid to real estate agents, which can cut closing costs considerably—for the seller, at least. Use this to negotiate for other seller concessions to lower your costs.
- Using seller financing. Seller financing—when the seller acts as the bank by holding a mortgage and letting the buyer pay off the property over time—doesn’t usually involve origination fees, and may also allow buyers to skip things like surveys and appraisals. They may also be able to skip inspections, but we don’t recommend this as buyers should still know the state of the property they’re buying before they close.
- Avoiding discount points. Some lenders offer borrowers the opportunity to lower their interest rate by prepaying interest on their loan. Buying down an interest rate can be attractive in the long term because it can significantly lower the total interest paid over the life of your loan, but can also represent significant upfront cost.
- Avoiding mortgage insurance. Conventional mortgages don’t require mortgage insurance for buyers who make a down payment of at least 20%. If you can’t make a 20% down payment, you may have to pay for mortgage insurance; or, if you use an FHA or USDA loan, you’ll have to use the mortgage insurance provided in their loan programs.
Additionally, certain closing costs can sometimes be added to a buyer’s loan amount, rather than paying it in cash at closing. What costs can be rolled into your loan vary by lender, but may include origination fees, appraisal and inspection fees or title fees. While this can lead to some initial cost savings, it will actually increase the total mortgage cost, as you’ll pay interest on these expenses over the life of the loan.
What is Included in Closing Costs?
The specific items included in closing costs vary from transaction to transaction and depend on the individual buyer, seller, property, property type, loan type and loan amount. While not all of these costs are paid by buyers, they are numerous:
Appraisal Fee
When buyers get a mortgage on a property, their lender wants to know the property is worth more than they’re lending against it—because, if you default, the lender will need to sell your property in order to get their money back. So, they have it appraised. These appraisals may be paid for separately or added to the loan balance.
Inspection Fee
Inspections are done to check the state of a property before the lender issues a loan. Similar to an appraisal, lenders want to make sure the property they’re lending against is in good condition and not affected by things such as termites or water damage. Also, like appraisal fees, these costs may be paid separately or can sometimes be added to a buyer’s loan balance.
Loan Origination Points
Loan origination fees are a percentage of the loan value that borrowers pay in order to secure their loan. These points may cover the loan origination fee (usually a flat amount) as well as an application fee that some lenders charge. Points may also cover other fees charged by lenders, loan broker fees and other costs.
Mortgage Discount Points
Some lenders offer borrowers the option of lowering their interest rate in exchange for prepaying a portion of the interest due over the term of their loan. This is called “buying down” an interest rate. For every 1% of interest that borrowers prepay, they can usually lower the interest rate for the term of their loan by about 0.25%.
Mortgage Insurance Premium
If you make a down payment of less than 20%, your lender may require you to buy private mortgage insurance (PMI), which can involve upfront premium payments. If you use a government loan, such as an FHA or USDA loan, you will have to pay premiums for mortgage insurance provided by those programs.
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Prorated Real Estate Taxes
When someone sells a property, they’re usually required to pay the real estate taxes for the portion of the year for which they’ve held the property. This is because the buyer will pay the real estate taxes for the full year when they get their property tax bill at the next billing cycle. The seller is simply crediting back the real estate taxes due for the portion of the year they owned the property.
Real Estate Commissions
Real estate commissions are usually paid by sellers when properties are listed for sale. These costs are usually at least 5% to 6% of the purchase price, but can be 10% or more, depending on the specific broker and property type.
Recording Fee
When someone buys real estate, a new deed showing their ownership must be filed with the local county recorder. This document shows the new ownership of the property, and counties typically charge a nominal fee for filing the new deed.
Stamp tax
Transfer tax is owed when ownership of real property transfers from a seller to a buyer. In many cases, these taxes are small, but they can be substantial in some areas of the country.
Survey Fee
If a survey hasn’t been done in a while or is unclear from previous deeds, a property may need a new survey before preparing the new deed. Surveyors outline the dimensions of a property to create a map that outlines legal boundaries and land features. Surveys also are necessary if someone is buying part of a parcel or buying multiple parcels that may be combined as part of the sale.
Title Fee
This is a fee that an attorney or title company charges for checking the title for a property. As part of this process, the attorney checks to make sure that the seller can actually convey a clean title and there are no liens or other encumbrances. They also prepare a new deed as part of the sale. The cost for these services usually ranges from a few hundred to a few thousand dollars depending on the state in which you live.
Title Insurance
Title insurance protects a buyer in case there are problems with the title from before purchase or if problems arise later if, for example, someone files a fraudulent deed trying to take possession of their property (a common form of fraud). If something happens that reduces the buyer’s interest in their property, title insurance will cover the cost to fix it.
The Bottom Line
The closing costs owed when someone purchases a property can be substantial. Specific closing costs vary depending on the type of property you’re buying, whether you’re using financing and even your specific purchase agreement. While some of these items are paid by sellers, buyers should expect to pay 2% to 5% of their purchase price upfront as closing costs, in addition to their down payment.
